We have arrived at the official mid-year standpoint. So far this year, gains have been the rule; optimism, the exception. With fear on the front burner, many investors are staying out of the market’s kitchen. Not me. In fact, I think the current climate creates more opportunities than not — and the following best Fidelity funds to buy the market in July speak for themselves.
Before I go there, let me state unequivocally that now is not the time to buy whole, major markets in passive index fund or exchange-traded fund (ETF) baskets. There are way too many overvaluation ants and spoiled stocks to make me want to go on that picnic.
Instead, as has been the case year-long, actively managed funds, especially actively managed sector funds, offer a compelling way to net the best of both the risk management and return potential worlds. Narrowly focused sector ETFs can also play a meaningful trading role in your July portfolio.
And there’s no better place to invest in and profit from sector investing than Fidelity. Fidelity has the broadest array of actively managed sector funds available — and they also have the lowest cost, commission-free sector ETFs.
That’s where I’d go to load up my quiver with investment arrows for July’s hunt. Here’s what I’m hunting:
Attractive absolute and relative valuations and strengthening domestic and global economies make buying any dip in financials a smart July buy. My approach: Buy the Fidelity Select Banking Fund (MUTF:FSRBX) and hold on to it.
The opposite of that buy-and-hold recommendation is my trading call: Oversupply and slow growth have pummeled oil prices all year long; oil prices crashed into bear market territory in June — down over 20%. Aggressive investors may think that that puts a bull’s eye on energy stocks. They may be right.
If so, Fidelity Select Energy (MUTF:FSENX) would be my choice to take long-term advantage of any major new down tick. But for traders, those looking to move in and out of a position in a very short time frame, I’d opt for Fidelity’s commission free and ultra-low cost MSCI Energy ETF (NYSEARCA:FENY).
The post-election bloom recently came off the banking sector; it fell 11.3% from its post-election peak on March 1 to its mid-April low. (With a large portion of that fall occurring shortly after the Fed’s March rate hike.)
The fund went on to gain 6.5% in the month of June, though, thanks to slightly less feverish fear over Trump’s inability to act on his stated revised regulatory overhang of this industry, and helped by his administration’s issuance of a report (aka game plan) released by Treasury Secretary Steven Mnuchin on June 13.
The 150-page report contains 100 suggestions that are expected to be enacted by regulators, as opposed to a bi-partisan effort in congress. Among the suggestions are lifting restrictions on big banks within trading operations and creating an easier stress test process for banks to pass as well.
Even before such regulatory pull backs, we have seen already some progress in the latter, with Citigroup Inc (NYSE:C), Wells Fargo & Company (NYSE:WFC) and Bank of America Corporation (NYSE:BAC) — all top holdings in FSRBX’s portfolio — passing the Federal Reserve’s stress test in June.
The result: C increased its dividend from 16 cents to 32 cents while announcing a buyback program of $15.6 billion on June 29, which is the largest in the company’s history. WFC gave its dividend of 3% a lift to 39 cents and approved an $11.5 billion repurchase. BAC jumped its dividend from 60% to 12 cents and approved a $12 billion buyback.
Given that Citi, Wells Fargo and BofA are top-five holdings in the FSRBX portfolio, this is all good news. But this also comes as stock prices are being pushed higher in the Financials space, a fact likely not lost on manager Matthew Reed, who recognizes the need to proceed with caution and choose wisely when selecting bank stocks.
Matt Reed became the sole manager of FSRBX on March 31, 2017 after John Sheehy stepped down from the portfolio. Previously, Sheehy and Reed had been co-managing the fund together since Matt first arrived at the fund on September 2016, with Sheehy training Reed how to handle the fund (his very first) to ensure a smooth transition after John’s departure.
A good move, given the political climate at the time and the bottoms-up approach involved in selecting bank stocks.
While the kind of economic growth we’re experiencing is promising for banks, it has been punishing the oil patch.
At Fidelity Select Energy, manager John Dowd invests in companies involved in many different forms of energy, not just oil, including: gas, electricity, coal, nuclear, geothermal, oil shale and solar power. Plus, Dowd bring 24 years’ worth of insight into the oil patch.
However, the price of oil — and the energy industry that supports it — has fluctuated drastically even inside just the past five years, when we’ve seen a barrel of oil sell for over $110 and under $30. And that has hurt the fund’s performance.
While Select Banking was making its comeback in June, oil prices continued to fall on news of U.S. inventory build and no signs of global growth heating up — with WTI plummeting more than 5% on June 6. This translated to a decline of 3% for FSENX in June, and a drop of 18.9% year-to-date.
Energy stocks tend to move up and down with the price of oil, which is notoriously difficult to predict. So while I respect John Dowd’s skills as a manager, I want to see more evidence of greater global demand before I shift back into a long-term Buy rating here. But, I don’t have to wait to make my July trader call: Buy MSCI Energy ETF if oil prices fall 5% or more from their July open price of $46.02. If they don’t, don’t.
Choosing quality over quantity along with diversity in the portfolio provides a clearer view of smart and patient risk management. We are seeing some momentum in the banking industry over the last month or so and it will be interesting to see if Reed can push all of the right buttons as a rookie manager to help Select Banking fund stay steady or better off.
If we see banking stocks dip like they did in March and April — whether it’s due to markets that doubt the Trump administration’s ability to lessen regulation, or a Fed that appears a little more tepid regarding their rate-hike regimen, or something else altogether — FSRBX may be the sector fund to buy July.
Jim Lowell is the editor of Fidelity Investor. Click here for Jim’s latest special report and discover Fidelity’s Top 20 Favorite Stocks — the most-owned, and most-liked, by Fidelity’s top managers.